What to expect from AIG earnings

LeslieScism

American International Group Inc., the big insurer that received (and later repaid) one of the biggest bailout packages of the financial crisis, is expected to announce its fourth-quarter earnings after the market closes Thursday.

This will be the first full quarter at the helm of the global insurer for Peter Hancock, who took over as chief executive from Robert Benmosche in September. Hancock will be on Friday morning’s conference call from California, where he is participating in a White House summit on cybersecurity at Stanford University. AIG
AIG, +0.41%
is a major seller in the burgeoning area of cyber-risk insurance.

Here are five things to watch and listen for:

Earnings: The consensus of analysts surveyed by Thomson Reuters is $1.05 a share of operating income, compared with $1.15 in the year-earlier period. But a prominent bull on the shares anticipates a substantial miss. Bernstein’s Josh Stirling, who has the equivalent of a “buy” recommendation on AIG, has been expecting a profit of just 84 cents a share. He sees the quarterly results being weighed down by a reserve addition tied to the company’s updating of its interest-rate assumptions for its workers’ compensation coverage, and predicts the company may have some other “clean-up” costs as it continues its turnaround. AIG’s year-earlier quarterly operating profit benefited from unusually low catastrophe costs, and the most-recent results will benefit too, as the North Atlantic hurricane season was quiet.

Other issues: Hancock has said he doesn’t expect abrupt changes in strategy and objectives. But he has made one notable change: The company will now report its results under two overall operating segments--Commercial Insurance and Consumer Insurance--while scrapping its previous breakdown of results by type of insurance: primarily, property-casualty and life. Under the new arrangement, the company will group commercial property-casualty insurance with mortgage guaranty insurance and the institutional-business side of its previous life-insurance and retirement-services unit. Its new consumer segment will include retirement products, and life, auto, home and other types of personal insurance.

Pricing: Insurance-industry analysts closely monitor growth in premium, rather than overall revenue (which includes investments). Even though the U.S. economy has shown signs of improvement, prices have been softening in the commercial property-and-casualty industry in recent months. AIG is a dominant seller of property-casualty insurance to businesses world-wide, so analysts will be listening closely to what it has to say about pricing.

Costs: As price increases are harder to come by, expenses are now a bigger focus of investors. “Expense management becomes a key priority for combined-ratio improvement,” the insurance team from Morgan Stanley wrote in a recent note, referencing the closely watched measure of what insurers spend on claims and expenses relative to each premium dollar. Improving the ratio “is a key driver” for AIG to report a double-digit return on equity, the firm says. AIG made “significant progress” in improving its combined ratio from 2011 to 2013 but investors want evidence that the improvement will continue, Morgan Stanley wrote.

Buybacks: With commercial-insurance pricing possibly turning negative in 2015, insurers increasingly need to buy back stock to help keep results in-line. Many analysts see significant capital management as central to AIG improving its return on equity, but Morgan Stanley wrote that potential new federal regulation over AIG and a few other firms prevents the company or its shareholders from projecting buybacks or dividends too far into the future. But for now, investors will watch to see if its share-buyback pace held steady in the fourth quarter after the company repurchased about $3.4 billion of its own stock year-to-date through Sept. 30. Investors are hoping the company will announce that its board has authorized buying a substantial number of additional shares.

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